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Euro and Pound Gap Lower But Stabilize – Will Support Hold?

Last updated 3/2/2009 5:52 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Asian/European Equities tumble as EZ fails to to help Easterm Europe
• HSBC to float 17 Billion rights issue at 40% discount to market , abandon most North American business
• AIG to get another 30 Billion infusion from US government taking them to $150 Billin total
• Oil at $43/bbl as rally continues
• Gold above $950/oz at $958

Overnight Eco

• AUD AiG Performance of Mfg Index 31.7 vs. 36.6 last
• AUD HIA New Home Sales jumped to 8.3% vs. -1.7%
• AUD MI Inflation Gauge 0.7%
• JPY Average Cash Earnings -1.35 vs. -1.2% eyed
• AUD Commodity Prices 19.70% vs. 29.10%
• CHF SVME PMI 32.6 vs. 34.8 called
• EUR Final Manufacturing PMI 33.5 vs. 33.6
• GBP Mortgage Approvals 31K
• GBP Manufacturing PMI 34.7
• EUR CPI Flash Estimate 1.2% vs. 1.1%

Event Risk on Tap

• CAD GDP expected at -0.5%
• USD Core PCE Price Index expected at 0.1%
• USD Personal Spending expected at 0.3%
• USD ISM Manufacturing PMI expected at 34.0
• USD ISM Manufacturing Prices expected at 35.5

Price Action

• USD/JPY drops to 9700 on risk aversion but generally contained
• AUD/USD holds 6300 and bounces ahead of RBA tommorow
• GBP/USD gaos lower on open but holds 1.4200 despite low PMI data
• EUR/USD probes 1.2555 on Eastern European worries but bouncesto 1.2600 in early Europe

Both the euro and pound gapped lower in Asia at the start of weekly trade after a disappointing EZ summit failed to come up with any coordinated solution to the growing Eastern European debt problem which threatens many Western European banks. With nearly $400 Billion of consumer and corporate Easter European debt, most of it denominated in euros and Swiss francs, due to be rolled over this year, EZ financial institutions face a specter of massive loans defaults unless some sort of a restructuring deal  is reached.

As we wrote earlier, “With Eastern European currencies off by nearly 50% against the EUR/USD it seems highly improbable that borrowers in those nations will make good on their debt.  Therefore, the lack of progress at  this week-end’s meeting may only delay the inevitable and without any serious and substantial renegotiation of current obligations defaults are likely to skyrocket putting yet more stress on the already strained European banking sector.”

Nevertheless, after testing the recent swing lows of 1.2555 EUR/USD managed to stabilize in late morning European trade as defense of the option barriers at the 1.2500 level kept the bid in the pair for now. On the economic front the latest CPI data printed slightly hotter at 1.2% versus 1.1% called. The news isn’t going to alter the expected ECB rate cut at this Thursday’s meeting, but given the central banks notorious hawkishness will most likely prevent the monetary officials from entertaining the possibility of lowering rates by more than the 50bp forecast by the market. With GDP in the region expected to contract by 3% some analysts anticipated a more aggressive move by Mr. Trichet and company but given the slight uptick in price levels the central bankers from Frankfurt will no doubt opt for their typical gradualist approach.  

In UK the PMI Manufacturing data hit a new low at 34.7 versus 35 forecast and 35.8 the period prior.  Mortgage approvals also printed less than forecast at 31K versus 33K projected. Despite the continuing contraction in economic data, the latest news suggests that the rate of decline has slowed materially, and while today’s reports are hardly a cause for celebration, they may be a hint that the UK economy is stabilizing albeit at lower levels.

In North America today the focus will turn to US Personal consumption and spending data and ISM Manufacturing figures. The currency market expects the news to be grim,  but unless the data produces a massive surprise to the downside the price reaction is likely to be muted.  Rather it is the technical picture that may prove to be dominant in US trade. 

Once the 10 AM New York option cut passes, it will be interesting to see if the EUR/USD tries to target the 1.2500 handle again. The pair has managed to hold support at that level twice but it still remains a magnet for euro shorts looking to run stops at that barrier.  We continue to believe that unless EZ officials begin to make quick progress on the issue the deteriorating economic conditions in Eastern Europe threaten to explode into a full blown financial catastrophe.  With the pair so tantalizingly close to the 1.2500 barrier it appears to only a matter of time before that key support level gives way.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.